FITBIT INC, 10-Q filed on 11/5/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
9 Months Ended
Sep. 29, 2018
Oct. 24, 2018
Entity Information [Line Items]    
Entity Registrant Name FITBIT INC  
Entity Central Index Key 0001447599  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Document Type 10-Q  
Document Period End Date Sep. 29, 2018  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
Amendment Flag false  
Common Class A [Member]    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   217,249,641
Common Class B [Member]    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   31,281,638
v3.10.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Sep. 29, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 402,237 $ 341,966
Marketable securities 221,083 337,334
Accounts receivable, net 325,964 406,019
Inventories 195,112 123,895
Income tax receivable 8,962 77,882
Prepaid expenses and other current assets 45,541 97,269
Total current assets 1,198,899 1,384,365
Property and equipment, net 106,520 104,908
Goodwill 61,058 51,036
Intangible assets, net 25,680 22,356
Deferred tax assets 3,920 3,990
Other assets 10,003 15,420
Total assets 1,406,080 1,582,075
Current liabilities:    
Accounts payable 232,991 212,731
Accrued liabilities 386,384 452,137
Deferred revenue 27,350 35,504
Income taxes payable 6,580 928
Total current liabilities 653,305 701,300
Long-term deferred revenue 5,458 6,928
Other liabilities 52,596 49,884
Total liabilities 711,359 758,112
Commitments and contingencies (Note 6)
Stockholders’ equity:    
Class A and Class B common stock 25 24
Additional paid-in capital 1,025,803 956,060
Accumulated other comprehensive income (loss) 3,333 (9)
Accumulated deficit (334,440) (132,112)
Total stockholders’ equity 694,721 823,963
Total liabilities and stockholders’ equity $ 1,406,080 $ 1,582,075
v3.10.0.1
Condensed Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 29, 2018
Sep. 30, 2017
Sep. 29, 2018
Sep. 30, 2017
Income Statement [Abstract]        
Revenue $ 393,575 $ 392,522 $ 940,784 $ 1,044,763
Cost of revenue 240,061 217,762 554,132 602,459
Gross profit 153,514 174,760 386,652 442,304
Operating expenses:        
Research and development 79,840 84,170 256,223 252,471
Sales and marketing 66,676 77,536 239,573 269,442
General and administrative 24,812 40,690 91,111 102,815
Total operating expenses 171,328 202,396 586,907 624,728
Operating loss (17,814) (27,636) (200,255) (182,424)
Interest income, net 2,072 1,162 5,599 2,451
Other income (expense), net (5,141) (702) (2,366) 134
Loss before income taxes (20,883) (27,176) (197,022) (179,839)
Income tax expense (benefit) (18,827) 86,227 4,179 51,883
Net loss $ (2,056) $ (113,403) $ (201,201) $ (231,722)
Net loss per share:        
Basic (in dollars per share) $ (0.01) $ (0.48) $ (0.83) $ (1.00)
Diluted (in dollars per share) $ (0.01) $ (0.48) $ (0.83) $ (1.00)
Shares used to compute net loss per share:        
Basic (in shares) 245,838 234,242 242,746 230,918
Diluted (in shares) 245,838 234,242 242,746 230,918
v3.10.0.1
Condensed Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 29, 2018
Sep. 30, 2017
Sep. 29, 2018
Sep. 30, 2017
Statement of Comprehensive Income [Abstract]        
Net loss $ (2,056) $ (113,403) $ (201,201) $ (231,722)
Cash flow hedges:        
Change in unrealized gain (loss) on cash flow hedges, net of tax benefit (expense) of $43, $192, $709 and $(7), respectively 868 (6,793) 6,780 (20,582)
Less: reclassification for realized net gains included in net loss, net of tax expense (benefit) of $(115), $-, $(244) and $7, respectively (2,334) 6,617 (3,362) 8,264
Net change, net of tax (1,466) (176) 3,418 (12,318)
Change in foreign currency translation adjustment 0 0 0 314
Change in unrealized gain (loss) on available-for-sale investments, net of tax 120 48 (88) 133
Less reclassification for realized net gain (loss) 0 0 12 (12)
Net change, net of tax 120 48 (76) 121
Comprehensive loss $ (3,402) $ (113,531) $ (197,859) $ (243,605)
v3.10.0.1
Condensed Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 29, 2018
Sep. 30, 2017
Sep. 29, 2018
Sep. 30, 2017
Statement of Comprehensive Income [Abstract]        
Change in unrealized gain (loss) on cash flow hedges, tax $ 43 $ 192 $ 709 $ (7)
Reclassification for realized net gains included in net income, tax $ (115) $ 0 $ (244) $ 7
v3.10.0.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
9 Months Ended
Sep. 29, 2018
Sep. 30, 2017
Cash Flows from Operating Activities    
Net loss $ (201,201) $ (231,722)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Provision for doubtful accounts 37 7,805
Provision for inventory obsolescence 9,019 13,395
Depreciation 35,388 28,338
Write-off of property and equipment 7,513 5,250
Amortization of intangible assets 5,866 4,134
Stock-based compensation 73,613 67,256
Deferred income taxes (1,690) 132,815
Impairment of equity investment 6,000 0
Other (693) 1,301
Changes in operating assets and liabilities, net of acquisition:    
Accounts receivable 80,227 208,899
Inventories (80,064) 79,448
Prepaid expenses and other assets 123,356 (125,504)
Accounts payable 16,357 (122,160)
Accrued liabilities and other liabilities (68,208) (48,869)
Deferred revenue (9,649) (9,846)
Income taxes payable 5,653 (1,822)
Net cash provided by operating activities 1,524 8,718
Cash Flows from Investing Activities    
Purchase of property and equipment (40,174) (58,199)
Purchases of marketable securities (284,986) (494,540)
Sales of marketable securities 93,020 19,806
Maturities of marketable securities 309,323 500,576
Acquisition, net of cash acquired (13,646) (556)
Net cash provided by (used in) investing activities 63,537 (32,913)
Cash Flows from Financing Activities    
Repayment of debt (747) 0
Proceeds from issuance of common stock 11,641 13,893
Taxes paid related to net share settlement of restricted stock units (15,684) (10,804)
Net cash (used in) provided by financing activities (4,790) 3,089
Net increase (decrease) in cash and cash equivalents 60,271 (21,106)
Effect of exchange rate on cash and cash equivalents 0 467
Cash and cash equivalents at beginning of period 341,966 301,320
Cash and cash equivalents at end of period $ 402,237 $ 280,681
v3.10.0.1
Basis of Presentation and Summary of Significant Accounting Policies
9 Months Ended
Sep. 29, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies
 
The accompanying condensed consolidated financial statements of Fitbit, Inc. (the “Company”) are unaudited. The condensed consolidated balance sheet at December 31, 2017 has been derived from the audited financial statements of the Company. The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information, and in management’s opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position, its results of operations, and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 29, 2018 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2018.

The Company’s fiscal year ends on December 31 of each year. The Company is on a 4-4-5 week quarterly calendar. There were 91 days in each of the three months ended September 29, 2018 and September 30, 2017, and 272 and 273 days in the nine months ended September 29, 2018 and September 30, 2017, respectively.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

Use of Estimates
 
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. The primary estimates and assumptions made by management are related to revenue recognition, reserves for sales returns and incentives, reserves for warranty, valuation of stock options, fair value of derivative assets and liabilities, allowance for doubtful accounts, inventory valuation, fair value of goodwill and acquired tangible and intangible assets and liabilities assumed during acquisitions, the number of reportable segments, the recoverability of intangible assets and their useful lives, contingencies, income taxes, impairment of equity investment, and unused advertising credits from a non-monetary transaction. Actual results could differ from those estimates, and such differences may be material to the condensed consolidated financial statements.

Significant Accounting Policies

There have been no significant changes in the Company’s accounting policies from those disclosed in its Annual Report on Form 10-K, except for the policies described below in relation to the adoption of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), discussed below in the section titled “Accounting Pronouncements Recently Adopted.”

Revenue Recognition

The Company recognizes revenue upon transfer of control of promised goods or services to customers at transaction price, an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Transaction price is calculated selling price net of variable consideration which may include estimates for future returns and sales incentives related to current period product revenue.

Products and Services

The Company derives substantially all of its revenue from sales of its wearable devices, which includes both connected health and fitness devices and accessories and smartwatches. The Company also generates a small portion of revenue from its subscription-based services. The Company considers delivery of its products to have occurred once control has transferred and delivery of services to have occurred as control is transferred. The Company recognizes revenue, net of estimated sales returns, sales incentives, discounts, and sales tax.

Arrangements with Multiple Performance Obligations

The Company enters into contracts that have multiple performance obligations that include hardware, software, and services. The first performance obligation is the hardware and firmware essential to the functionality of the connected health and fitness device or smartwatch delivered at the time of sale. The second performance obligation is the software services included with the products, which are provided free of charge and enable users to sync, view, and access real-time data on the Company’s online dashboard and mobile apps. The third performance obligation is the embedded right included with the purchase of the device to receive, on a when-and-if-available basis, future unspecified firmware upgrades and features relating to the product’s essential firmware. In addition, the Company occasionally offers a fourth performance obligation in bundled arrangements that allows access to subscription-based services related to the Company’s Fitbit Coach offering.

The Company allocates revenue to all performance obligations based on their relative standalone selling prices (“SSP”). The Company’s process for determining its SSP considers multiple factors including consumer behaviors, the Company’s internal pricing model, and cost-plus margin and may vary depending upon the facts and circumstances related to each deliverable. SSP for the health and fitness devices and smartwatches reflect the Company’s best estimate of the selling prices if they were sold regularly on a stand-alone basis and comprise the majority of the arrangement consideration. SSP for upgrade rights currently ranges from $1.00 to $3.00. SSP for the online dashboard and mobile apps is currently estimated at $0.99. SSP for access to Fitbit Coach subscription-based services is based on the price charged when sold separately.

Amounts allocated to the delivered wearable devices are recognized at the time of delivery, provided the other conditions for revenue recognition have been met. Amounts allocated to the online dashboard and mobile apps and unspecified upgrade rights are deferred and recognized on a straight-line basis over the estimated usage period.

The Company offers its users the ability to purchase subscription-based services, through which the users receive incremental features, including access to a digital personal trainer, in-depth analytics regarding the user’s personal metrics, or video-based customized workouts. Amounts paid for subscriptions are deferred and recognized ratably over the service period, which is typically one year. Revenue from subscription-based services was less than 1% of revenue for all periods presented.

In addition, the Company offers subscription-based software and services to certain customers in the corporate wellness program, which includes a real-time dashboard, and the ability to create corporate challenges. SSP for the corporate wellness subscription is determined based on the Company’s internal pricing model for anticipated renewals for existing customers and pricing for new customers. Revenue allocated to the corporate wellness subscription is deferred and recognized on a straight-line basis over the estimated access period of one year, which is the typical service period. Revenue for corporate wellness software and services was less than 1% of revenue for all periods presented.

The Company applies a practical expedient to expense costs to obtain a contract with a customer as incurred when the amortization period would be one year or less. The Company applies a practical expedient to not consider the effect of a significant financing component as it expects that the period between transfer of control and payment from customer to be one year or less.

The Company accounts for shipping and handling fees billed to customers as revenue. Sales taxes and value added taxes (“VAT”) collected from customers which are remitted to governmental authorities are not included in revenue, and are reflected as a liability on the consolidated balance sheets.

Rights of Return, Stock Rotation Rights, and Price Protection

The Company offers limited rights of return, stock rotation rights, and price protection under various policies and programs with its retailer and distributor customers and end-users. Below is a summary of the general provisions of such policies and programs:

Retailers and distributors are generally allowed to return products that were originally sold through to an end-user under provisions of their contracts, called “open-box” returns, and such returns may be made at any time after the original sale.
All purchases through Fitbit.com are covered by a 45-day right of return.
Certain distributors are allowed stock rotation rights which are limited rights of return of products purchased during a prior period, generally one quarter.
Certain distributors and retailers are allowed return rights for defective products.
Certain distributors are offered price protection that allows for the right to a partial credit for unsold inventory held by the distributor if the Company reduces the selling price of a product.
    
The Company estimates reserves for these policies and programs based on historical experience, and records the reserves as a reduction of revenue and an accrued liability. Through September 29, 2018, actual returns have primarily been open-box returns. In addition, through September 29, 2018, the Company has had limited price protection claims. On a quarterly basis, the amount of revenue that is reserved for future returns is calculated based on historical trends and data specific to each reporting period. The historical trends consider product life cycles, new product introductions, market acceptance of products, product sell-through, the type of customer, seasonality, and other factors. Return rates can fluctuate over time, but have been sufficiently predictable to allow the Company to estimate expected future product returns. The Company reviews the actual returns evidenced in prior quarters as a percent of related revenue to determine the historical rate of returns. The Company then applies the historical rate of returns to the current period revenue as a basis for estimating future returns. When necessary, the Company also provides a specific reserve for products in the distribution channel in excess of estimated requirements. This estimate can be affected by the amount of a particular product in the channel, the rate of sell-through, product plans, and other factors. The Company also considers whether there are circumstances which may result in anticipated returns higher than the historical return rate from direct customers and records an additional specific reserve as necessary. The estimates and assumptions used to reserve for rights of return, stock rotation rights, and price protection have been accurate in all material respects and have not materially changed in the past.

Sales Incentives

The Company offers sales incentives through various programs, consisting primarily of cooperative advertising and marketing development fund programs. The Company records advertising and marketing development fund programs with customers as a reduction to revenue unless it receives a distinct benefit in exchange for credits claimed by the customer and can reasonably estimate the fair value of the distinct benefit received, in which case the Company records it as a marketing expense. The Company recognizes a liability and reduces revenue for rebates or other incentives based on the estimated amount of rebates or credits that will be claimed by customers.

Refer to Note 10 for disaggregated revenue by geographic region, based on ship-to destinations.

Customer Bankruptcy

In September 2017, Wynit Distribution (“Wynit”) filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Wynit was the Company’s largest customer, historically representing 11% of total revenue during the six months ended July 1, 2017 and 19% of total accounts receivables as of July 1, 2017. As of July 1, 2017, collectability of accounts receivables from Wynit was reasonably assured. In connection with Wynit’s bankruptcy filing, the Company believed that the collectability of the product shipments to Wynit during the third quarter of 2017 was not reasonably assured.

The Company ceased to recognize revenue from Wynit, which totaled $8.1 million during the third quarter of 2017. Additionally, the Company recorded a charge of $35.8 million during the third quarter ended September 30, 2017 comprised of cost of revenue of $5.5 million associated with shipments to Wynit in the third quarter of 2017 and bad debt expense of $30.3 million associated with all of Wynit’s outstanding accounts receivables. The Company maintains credit insurance that covers a portion of the exposure related to its customer receivables. The Company recorded an insurance receivable based on an analysis of its insurance policies, including their exclusions, an assessment of the nature of the claim, and information from its insurance carrier. As of September 30, 2017, the Company had recorded an insurance receivable of $26.8 million, included in prepaid expenses and other current assets, associated with the amount it had concluded was probable related to the claim. The $26.8 million insurance receivable allowed the Company to recover $22.7 million of bad debt expense and $4.1 million of cost of revenue, resulting in a net charge of $9.0 million in the consolidated statement of operations comprised of net bad debt expense of $7.6 million and net cost of revenue of $1.4 million. The Company received $21.4 million of the insurance receivable during the fourth quarter of 2017 and the remaining $5.4 million in January 2018.

During the nine months ended September 29, 2018, the Company released $12.4 million in outstanding product return and rebate reserves related to Wynit, as it believed the possibility of future claims associated with these reserves was remote. This reserve release resulted in a $12.4 million increase in revenue during the nine months ended September 29, 2018.

Non-Monetary Transaction

The Company entered into an agreement with a third party during 2016 to exchange inventory for advertising credits and cash, which was amended in October 2018 to extend the contractual period from four to six years. The Company recorded the transaction based on the estimated fair value of the products exchanged. For the year ended December 31, 2016, the Company recorded $15.0 million of revenue and $7.0 million of associated cost of goods sold upon exchange of the products for advertising credits of $13.0 million and cash of $2.0 million. The $13.0 million of unused advertising credits remaining as of December 31, 2016 were recorded in prepaid expenses and other current assets, and other assets. Such credits are expected to be used over the contractual period of six years, and will be expensed as advertising services are received. During the three months ended September 29, 2018 and September 30, 2017, negligible amounts of credits were utilized in each of these periods, and during the nine months ended September 29, 2018 and September 30, 2017, $1.1 million and $0.3 million, respectively, of credits were utilized in each of these periods. The Company’s prepaid and other assets related to unused advertising credits as of September 29, 2018 and December 31, 2017 were $11.1 million and $12.2 million, respectively.

Recent Accounting Pronouncements

Accounting Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance; ASU 2017-13, ASU 2018-10 and ASU 2018-11 (collectively, Topic 842). Topic 842 requires lessees to recognize right-of-use assets and lease liabilities for operating leases, initially measured at the present value of the lease payments, on the balance sheet. Topic 842 will become effective for the Company on January 1, 2019, and requires adoption using a modified retrospective approach. The Company is continuing to make progress in evaluating the impact of this guidance on its consolidated financial statements, and preliminary assessments are subject to change. The Company’s implementation team has made progress in its project plan, which includes evaluating contracts, developing policies, processes and information technology tools to report financial results, and implementing and evaluating the Company’s internal controls over financial reporting that will be necessary under the new standard. Upon adoption, the Company expects to elect the transition package of practical expedients permitted within the new standard, which amount other things, allows the carryforward of the historical lease classification. The Company anticipates that the adoption will have a material impact on its consolidated balance sheets, as it will now include a right of use asset and a lease liability for the obligation to make lease payments related to substantially all operating lease arrangements; however, the Company does not expect the adoption to have a material impact on its consolidated statements of operations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to accounts receivable and available for sale debt securities. ASU 2016-13 will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. The second step measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under ASU 2017-04, a company will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 will be applied prospectively and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 will become effective for the Company on January 1, 2019 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements and will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements and will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

Accounting Pronouncements Recently Adopted

In May 2014, the FASB, issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

The Company adopted ASU 2014-09 effective January 1, 2018, utilizing the modified retrospective transition method. Prior periods were not retrospectively adjusted. Upon adoption, the Company recognized an immaterial cumulative effect of adopting this guidance as an adjustment to its opening accumulated deficit balance. The new standard may, in certain circumstances, impact the timing of when revenue is recognized for products shipped, and the timing and classification of certain sales incentives, which are expected to generally be recognized earlier than historical guidance. The Company believes the new guidance is materially consistent with its historical revenue recognition policy. In addition, ASU 2014-09 requires the presentation of sales returns reserve as a current liability. The Company’s sales return reserve was $78.5 million as of September 29, 2018, presented within “Accrued liabilities” and was $109.9 million as of December 31, 2017, presented within “Accounts receivable, net.”

The impact to revenue, accounts receivable, deferred revenue, and accrued liabilities as a result of applying ASU 2014-09 for the three and nine months ended or as of September 29, 2018 was as follows (in thousands):
 
Three Months Ended September 29, 2018
 
Nine Months Ended September 29, 2018
 
Under ASC 605
Impact
Under ASC 606
 
Under ASC 605
Impact
Under ASC 606
 
 
 
 
 
 
 
 
Revenue
$
395,438

$
(1,863
)
$
393,575

 
$
941,272

$
(488
)
$
940,784

Accounts receivable, net
247,447

78,517

325,964

 
247,447

78,517

325,964

Deferred revenue
33,102

(294
)
32,808

 
33,102

(294
)
32,808

Accrued liabilities
306,663

79,721

386,384

 
306,663

79,721

386,384

Accumulated deficit
(327,952
)
(6,488
)
(334,440
)
 
(327,952
)
(6,488
)
(334,440
)


The impact to other financial statement line items was immaterial. Adoption of the standard had no impact to net cash from or used in operating, investing, or financing activities in the Company’s condensed consolidated statement of cash flows.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The Company has elected to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). ASU 2016-15 provides guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 provides guidance in a number of situations including, among others, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, distributions received from equity method investees, and classifying cash receipts and payments that have aspects of more than one class of cash flows. ASU 2016-15 became effective for the Company on January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The purpose of ASU 2017-01 is to change the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. ASU 2017-01 became effective for the Company on January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 was issued to clarify and reduce both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718 to a change to the terms and conditions of a share-based payment award. ASU 2017-09 became effective for the Company on January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 amends the hedge accounting rules to simplify the application of hedge accounting standard and better portray the economic results of risk management activities in the financial statements. The standard expands the ability to hedge non-financial and financial risk components, reduces complexity in fair value hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, as well as eases certain hedge effectiveness assessment requirements. ASU 2017-12 becomes effective for the Company on January 1, 2019 with early adoption permitted. The Company early adopted this new standard in the first quarter of 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
v3.10.0.1
Fair Value Measurements
9 Months Ended
Sep. 29, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
 
The carrying values of the Company’s accounts receivable, accounts payable, and accrued liabilities approximated their fair values due to the short period of time to maturity or repayment.
 
The following tables set forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):
 
 
September 29, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Money market funds
$
218,567

 
$

 
$

 
$
218,567

U.S. government agencies

 
82,734

 

 
82,734

Corporate debt securities

 
207,378

 

 
207,378

Derivative assets

 
4,681

 

 
4,681

Total
$
218,567

 
$
294,793

 
$

 
$
513,360

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
86

 
$

 
$
86

Stock warrant liability

 

 
412

 
412

Total
$

 
$
86

 
$
412

 
$
498


 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Money market funds
$
193,066

 
$

 
$

 
$
193,066

U.S. government agencies

 
79,624

 

 
79,624

Corporate debt securities

 
291,582

 

 
291,582

Total
$
193,066

 
$
371,206

 
$

 
$
564,272

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
2,138

 
$

 
$
2,138

Stock warrant liability

 

 
208

 
208

Total
$

 
$
2,138

 
$
208

 
$
2,346


 
The fair value of the Company’s Level 1 financial instruments is based on quoted market prices in active markets for identical instruments. The fair value of the Company’s Level 2 financial instruments is based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data.

In addition, Level 2 assets and liabilities include derivative financial instruments associated with hedging activity, which are further discussed in Note 3. Derivative financial instruments are initially measured at fair value on the contract date and are subsequently remeasured to fair value at each reporting date using inputs such as spot rates, forward rates, and discount rates. There is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets.

There were no Level 3 assets as of September 29, 2018 and December 31, 2017. There were Level 3 liabilities as of September 29, 2018 and December 31, 2017. There have been no transfers between fair value measurement levels during the three and nine months ended September 29, 2018 and September 30, 2017.

In December 2017, the Company acquired an equity ownership interest in a privately-held company in exchange for $6.0 million in cash. The Company does not have a controlling interest or the ability to exercise significant influence over the investee, and this investment does not have a readily determinable fair value. Upon adoption of ASU 2016-01 on January 1, 2018, the Company elected to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Such changes in the basis of the equity investment are recognized in “Other income (expense), net” in the Company’s consolidated statement of operations. During the three months ended September 29, 2018, the Company identified events and circumstances that indicated that there was a decline in the fair value of this investment. As a result, the Company performed an assessment of the financial condition, financial forecast, near-term financing prospects, and other factors of the issuer, and concluded that this equity investment was fully impaired and recorded an impairment loss of $6.0 million. This equity investment was classified within “Other assets” on the Company’s consolidated balance sheets as of September 29, 2018 and December 31, 2017.
v3.10.0.1
Financial Instruments
9 Months Ended
Sep. 29, 2018
Investments, Debt and Equity Securities [Abstract]  
Financial Instruments
Financial Instruments

Cash, Cash Equivalents and Marketable Securities

The Company’s marketable securities are classified as available-for-sale as of the balance sheet date and are reported at fair value with unrealized gains and losses reported, net of tax, as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity. Because the Company views marketable securities as available to support current operations as needed, it has classified all available-for-sale securities as current assets. Realized gains or losses and other-than-temporary impairments, if any, on available-for-sale securities are reported in other income (expense), net, as incurred.

Investments are reviewed periodically to identify potential other-than-temporary impairments. No impairment loss has been recorded on the securities included in the tables below because the Company believes that the decrease in fair value of these securities is temporary and expects to recover up to, or beyond, the initial cost of investment for these securities.

The following table sets forth cash, cash equivalents and marketable securities as of September 29, 2018 (in thousands):
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
 
 
 
 
 
 
 
 
 
 
 
 
Cash
$
114,641

 
$

 
$

 
$
114,641

 
$
114,641

 
$

Money market funds
218,567

 

 

 
218,567

 
218,567

 

U.S. government agencies
82,837

 
1

 
(104
)
 
82,734

 
13,649

 
69,085

Corporate debt securities
207,426

 
2

 
(50
)
 
207,378

 
55,380

 
151,998

Total
$
623,471

 
$
3

 
$
(154
)
 
$
623,320

 
$
402,237

 
$
221,083


The following table sets forth cash, cash equivalents and marketable securities as of December 31, 2017 (in thousands):
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
 
 
 
 
 
 
 
 
 
 
 
 
Cash
$
115,028

 
$

 
$

 
$
115,028

 
$
115,028

 
$

Money market funds
193,066

 

 

 
193,066

 
193,066

 

U.S. government agencies
79,722

 
1

 
(99
)
 
79,624

 
6,595

 
73,029

Corporate debt securities
291,738

 
15

 
(171
)
 
291,582

 
27,277

 
264,305

Total
$
679,554

 
$
16

 
$
(270
)
 
$
679,300

 
$
341,966

 
$
337,334



The gross unrealized gains or losses on marketable securities as of September 29, 2018 and December 31, 2017 were not material. There were no available-for-sale investments as of September 29, 2018 and December 31, 2017 that have been in a continuous unrealized loss position for greater than 12 months on a material basis.

The following table classifies marketable securities by contractual maturities (in thousands):
 
September 29, 2018
 
December 31, 2017
 
 
 
 
Due in one year
$
221,083

 
$
319,112

Due in one to two years

 
18,222

Total
$
221,083

 
$
337,334



Derivative Financial Instruments

The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies. In order to manage this risk, the Company may hedge a portion of its foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted revenues and expenses, using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The Company does not enter into derivative contracts for trading or speculative purposes.
 
Cash Flow Hedges
 
The Company has entered into foreign currency derivative contracts designated as cash flow hedges to hedge certain forecasted revenue and expense transactions denominated in currencies other than the U.S. dollar. The Company’s cash flow hedges consist of forward contracts with maturities of 12 months or less.

The Company periodically assesses the effectiveness of its cash flow hedges. Effectiveness represents a derivative instrument’s ability to generate offsetting changes in cash flows related to the hedged risk. The Company records the gains or losses, net of tax, related to its cash flow hedges as a component of accumulated other comprehensive income (loss) in stockholders’ equity and subsequently reclassifies the gains or losses into revenue and operating expenses when the underlying hedged transactions are recognized. If the hedged transaction becomes probable of not occurring, the corresponding amounts in accumulated other comprehensive income (loss) would immediately be reclassified to other income (expense), net. Cash flows related to the Company’s cash flow hedging program are recognized as cash flows from operating activities in its statements of cash flows. Prior to the adoption of ASU 2017-12, the Company recorded the gains or losses related to the ineffective portion of its cash flow hedges, if any, immediately in other income (expense), net. For the period ended September 30, 2017, the ineffective portion of the Company’s cash flow hedges were not material.

The Company had outstanding contracts with a total notional amount of $60.2 million in cash flow hedges for forecasted revenue as of September 29, 2018, and no outstanding contracts that were designated in cash flow hedges for forecasted revenue as of December 31, 2017.

Balance Sheet Hedges

The Company enters into foreign exchange contracts to hedge certain monetary assets and liabilities that are denominated in currencies other than the functional currency of its subsidiaries. These foreign exchange contracts are carried at fair value, do not qualify for hedge accounting treatment, and are not designated as hedging instruments. Changes in the value of the foreign exchange contracts are recognized in other income (expense), net, and offset the foreign currency gain or loss on the underlying net monetary assets or liabilities.

The Company had outstanding balance sheet hedges with a total notional amount of $146.3 million and $141.2 million as of September 29, 2018 and December 31, 2017, respectively.
 
Fair Value of Foreign Currency Derivatives

The foreign currency derivative contracts that were not settled at the end of the period are recorded at fair value, on a gross basis, in the condensed consolidated balance sheets. The following table presents the fair value of the Company’s foreign currency derivative contracts as of the periods presented (in thousands):
 
 
 
September 29, 2018
 
December 31, 2017
 
Balance Sheet Location
 
Fair Value Derivative
Assets
 
Fair Value Derivative Liabilities
 
Fair Value Derivative
Assets
 
Fair Value Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
Cash flow designated hedges
Prepaid expenses and other current assets
 
$
3,882

 
$

 
$

 
$

Cash flow designated hedges
Accrued liabilities
 

 

 

 

Hedges not designated
Prepaid expenses and other current assets
 
799

 

 

 

Hedges not designated
Accrued liabilities
 

 
86

 

 
2,138

Total fair value of derivative instruments
 
 
$
4,681

 
$
86

 
$

 
$
2,138



Financial Statement Effect of Foreign Currency Derivative Contracts

The following table presents the pre-tax impact of the Company’s foreign currency derivative contracts on other comprehensive income (“OCI”) and the condensed consolidated statements of operations for the periods presented (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
Income Statement Location
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
Foreign exchange cash flow hedges:
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in OCI – effective portion
 
 
$
911

 
$
(6,603
)
 
$
7,489

 
$
(20,590
)
Gain (loss) reclassified from OCI into income – effective portion
Revenue
 
2,449

 
(6,617
)
 
3,606

 
(6,897
)
Loss reclassified from OCI into income – effective portion
Operating expenses
 

 

 

 
(1,405
)
Gain recognized in income – ineffective portion
Other income, net
 

 

 

 
21

Gain recognized in income – excluded time value portion
Other income, net
 

 
672

 

 
1,516

Foreign exchange balance sheet hedges:
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in income
Other income, net
 
1,035

 
(2,062
)
 
3,335

 
(8,838
)


As of September 29, 2018, all net derivative gains related to the Company’s cash flow hedges will be reclassified from OCI into revenue within the next 12 months.

Effect of Derivative Contracts on Condensed Consolidated Statements of Operations

The following table provides the location in the condensed consolidated statements of operations and amount of the recognized gains or losses to the Company’s derivative instruments designated as hedging instruments (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
Total amounts presented in the condensed consolidated statement of operations in which the effects of cash flow hedges are recorded in revenue
$
393,575

 
$
392,522

 
$
940,784

 
$
1,044,763

Total amounts presented in the condensed consolidated statement of operations in which the effects of cash flow hedges are recorded in operating expenses
171,328

 
202,396

 
586,907

 
624,728

Gains (losses) on foreign exchange contracts designated as cash flow hedges reclassified from OCI into revenue
2,449

 
(6,617
)
 
3,606

 
(6,897
)
Losses on foreign exchange contracts designated as cash flow hedges reclassified from OCI into operating expenses

 

 

 
(1,405
)


Offsetting of Foreign Currency Derivative Contracts

The Company presents its derivative assets and derivative liabilities at gross fair values in the condensed consolidated balance sheets. The Company generally enters into master netting arrangements, which mitigate credit risk by permitting net settlement of transactions with the same counterparty. The Company is not required to pledge, and is not entitled to receive, cash collateral related to these derivative instruments.

The following tables set forth the available offsetting of net derivative assets under the master netting arrangements as of September 29, 2018 and December 31, 2017 (in thousands):

 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Gross Amounts Not Offset in Condensed Consolidated Balance Sheets
September 29, 2018
Gross Amounts Recognized
 
Gross Amounts Offset
 
Net Amounts Presented
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts assets
$
4,681

 
$

 
$
4,681

 
$
86

 
$

 
$
4,595

Foreign exchange contracts liabilities
86

 

 
86

 
86

 

 

 
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Gross Amounts Not Offset in Condensed Consolidated Balance Sheets
December 31, 2017
Gross Amounts Recognized
 
Gross Amounts Offset
 
Net Amounts Presented
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts assets
$

 
$

 
$

 
$

 
$

 
$

Foreign exchange contracts liabilities
2,138

 

 
2,138

 

 

 
2,138

v3.10.0.1
Balance Sheet Components
9 Months Ended
Sep. 29, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Balance Sheet Components
Balance Sheet Components

Deferred Revenue

Deferred revenue consists of deferred shipments in transit for which control has not yet transferred, deferred software, or amounts allocated to mobile dashboard and on-line apps and unspecified upgrade rights, and deferred subscription-based services for which payments have been received by the customer prior to revenue recognition of these performance obligations. The deferred shipments performance obligation is anticipated to be recognized within the next quarter. The deferred software and deferred subscription-based services performance obligations are anticipated to be recognized over the useful life or service periods of twelve to seventeen months.

Changes in the total short-term and long-term deferred revenue balance were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 29, 2018
 
 
 
 
Beginning balances
$
32,835

 
$
42,432

Deferral of revenue
10,176

 
25,885

Recognition of deferred revenue
(10,203
)
 
(35,509
)
Ending balances
$
32,808

 
$
32,808



Revenue Returns Reserve
 
Revenue returns reserve activities were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017(1)
 
September 29, 2018
 
September 30, 2017(1)
 
 
 
 
 
 
 
 
Beginning balances
$
74,996

 
$
51,520

 
$
109,872

 
$
98,851

Increases
43,383

 
56,445

 
106,385

 
146,356

Returns taken
(39,862
)
 
(46,067
)
 
(137,740
)
 
(183,309
)
Ending balances
$
78,517

 
$
61,898

 
$
78,517

 
$
61,898


(1) 
The Company corrected the amounts presented as “Increases” and “Returns taken” for the three and nine months ended September 30, 2017. The Company did not consider this correction to be material since it had no impact on the beginning and ending balances of the revenue returns reserve and did not have any impact on its condensed consolidated balance sheets and statements of operations.

Increases in the revenue returns reserve include provisions for open box returns and stock rotations.

Inventories
 
Inventories consisted of the following (in thousands):
 
September 29, 2018
 
December 31, 2017
  
 
 

 

Components
$
19,608

 
$
3,825

Finished goods
175,504

 
120,070

Total inventories
$
195,112

 
$
123,895


 
Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets consisted of the following (in thousands):
 
September 29, 2018
 
December 31, 2017
  
 
 
 
 
 
Prepaid expenses
$
16,298

 
$
24,204

Point-of-purchase displays, net
8,114

 
14,750

Derivative assets
4,681

 

Prepaid marketing
2,525

 
6,074

Insurance receivable

 
37,300

Other
13,923

 
14,941

Total prepaid expenses and other current assets
$
45,541

 
$
97,269



Property and Equipment, Net
 
Property and equipment, net, consisted of the following (in thousands):
 
September 29, 2018
 
December 31, 2017
  
 
 
 
 
 
Tooling and manufacturing equipment
$
69,889

 
$
66,854

Furniture and office equipment
22,756

 
20,942

Purchased and internally-developed software
20,925

 
18,112

Leasehold improvements
66,053

 
58,431

Total property and equipment
179,623

 
164,339

Less: Accumulated depreciation and amortization
(73,103
)
 
(59,431
)
Property and equipment, net
$
106,520

 
$
104,908


 
Total depreciation and amortization expense related to property and equipment, net was $11.8 million and $9.1 million for the three months ended September 29, 2018 and September 30, 2017, respectively, and $35.4 million and $28.3 million for the nine months ended September 29, 2018 and September 30, 2017, respectively.

Goodwill and Intangible Assets

The changes in the carrying amount of goodwill were as follows (in thousands):
 
Goodwill
 
 
 
Balance at December 31, 2017
$
51,036

Goodwill acquired
10,022

Balance at September 29, 2018
$
61,058



The increase in the carrying amount of goodwill during the nine months ended September 29, 2018 was attributable to an acquisition in February 2018 described in Note 11.

The carrying amounts of the intangible assets as of September 29, 2018 and December 31, 2017 were as follows (in thousands, except useful life):
 
September 29, 2018
 
December 31, 2017
  
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
 
 
 
 
 
 
 
 
 
 
 
 
Developed technology
$
35,988

 
$
(14,116
)
 
$
21,872

 
$
30,588

 
$
(8,738
)
 
$
21,850

Customer relationships
3,790

 
(316
)
 
3,474

 

 

 

Trademarks and other
1,278

 
(944
)
 
334

 
1,278

 
(772
)
 
506

Total intangible assets, net
$
41,056

 
$
(15,376
)
 
$
25,680

 
$
31,866

 
$
(9,510
)
 
$
22,356



The increase in the carrying amount of goodwill during the nine months ended September 29, 2018 was attributable to an acquisition in February 2018 described in Note 11. Total amortization expense related to intangible assets was $2.1 million and $1.4 million for the three months ended September 29, 2018 and September 30, 2017, respectively, and $5.9 million and $4.1 million for the nine months ended September 29, 2018 and September 30, 2017, respectively.

The estimated future amortization expense of acquired finite-lived intangible assets to be charged to cost of revenue and operating expenses after September 29, 2018 was as follows (in thousands):
  
Cost of Revenue
 
Operating Expenses
 
Total
 
 
 
 
 
 
Remaining 2018
$
1,854

 
$
207

 
$
2,061

2019
6,634

 
827

 
7,461

2020
5,854

 
643

 
6,497

2021
5,854

 
597

 
6,451

2022
1,180

 
597

 
1,777

Thereafter

 
1,433

 
1,433

Total finite-lived intangible assets, net
$
21,376

 
$
4,304

 
$
25,680



Accrued Liabilities
 
Accrued liabilities consisted of the following (in thousands):
 
September 29, 2018
 
December 31, 2017
 
 
Accrued sales incentives
$
98,812

 
$
111,592

Accrued revenue reserve from returns
78,517

 

Product warranty
47,855

 
87,882

Accrued manufacturing expense and freight
32,738

 
41,901

Employee-related liabilities
30,949

 
33,266

Accrued co-op advertising and marketing development funds
19,599

 
30,408

Accrued sales and marketing
15,325

 
44,401

Inventory received but not billed
15,218

 
10,526

Sales taxes and VAT payable
15,191

 
21,340

Accrued research and development
6,064

 
8,983

Accrued legal settlements and fees
4,979

 
36,693

Derivative liabilities
86

 
2,138

Other
21,051

 
23,007

Accrued liabilities
$
386,384

 
$
452,137


Product warranty reserve activities were as follows (in thousands)(1):
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
Beginning balances
$
50,468

 
$
72,761

 
$
87,882

 
$
99,923

Charged to cost of revenue
9,245

 
26,825

 
(1,722
)
 
44,167

Changes related to pre-existing warranties
(1,354
)
 
5,669

 
(9,226
)
 
8,142

Settlement of claims
(10,504
)
 
(18,576
)
 
(29,079
)
 
(65,553
)
Ending balances
$
47,855

 
$
86,679

 
$
47,855

 
$
86,679

 

(1) 
Does not include reserves established as a result of the recall of the Fitbit Force. See the section titled “Fitbit Force Recall Reserve” in the Company’s Annual Report on Form 10-K for additional information regarding such reserves.

Restructuring

In January 2017, the Company announced cost-efficiency measures to be implemented in 2017 that include realigning sales and marketing spend and improved optimization of research and development investments. In addition, the Company announced a reorganization, including a reduction in workforce. This reorganization impacted approximately 110 employees, or approximately 6% of the Company’s global workforce. The Company recorded $6.4 million in total restructuring expenses, substantially all of which were severance and related costs, in the first quarter of 2017. The Company completed the reorganization in the fourth quarter of 2017.

Accumulated Other Comprehensive Income (Loss)

The components and activity of accumulated other comprehensive income (“AOCI”), net of tax, were as follows (in thousands):

 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Currency Translation Adjustments
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Total
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
66

 
$

 
$
(75
)
 
$
(9
)
Other comprehensive income (loss) before reclassifications
6,780

 

 
(88
)
 
6,692

Amounts reclassified from AOCI
(3,362
)
 

 
12

 
(3,350
)
Other comprehensive income (loss)
3,418

 

 
(76
)
 
3,342

Balance at September 29, 2018
$
3,484

 
$

 
$
(151
)
 
$
3,333

v3.10.0.1
Long-Term Debt
9 Months Ended
Sep. 29, 2018
Debt Disclosure [Abstract]  
Long-Term Debt
Long-Term Debt
 

2015 Credit Agreement
 
In December 2015, the Company entered into a second amended and restated credit agreement (the “Senior Facility”) with Silicon Valley Bank (“SVB”), as administrative agent, collateral agent, and lender, SunTrust Bank as syndication agent, SunTrust Robinson Humphrey, Inc. and several other lenders to replace the existing asset-based credit facility and cash flow facility. The Senior Facility allowed the Company to borrow up to $250.0 million, including up to $50.0 million for the issuance of letters of credit and up to $25.0 million for swing line loans, subject to certain financial covenants and ratios. The Company has the option to repay its borrowings under the Senior Facility without penalty prior to maturity. The Senior Facility requires the Company to comply with certain financial and non-financial covenants. The Senior Facility contains customary covenants that restrict the Company’s ability to, among other things, incur additional indebtedness, sell certain assets, guarantee certain obligations of third parties, declare dividends or make certain distributions, and undergo a merger or consolidation or certain other transactions. Obligations under the Senior Facility are collateralized by substantially all of the Company’s assets, excluding its intellectual property.

In May 2017, the Company entered into a first amendment to the Senior Facility (the “First Amendment”), pursuant to which the aggregate amount the Company can borrow under the Senior Facility was reduced from $250.0 million to $100.0 million, with up to $50.0 million available for the issuance of letters of credit and up to $25.0 million available for swing line loans. In addition, pursuant to the First Amendment, the applicable margin in respect of the interest rates under the Senior Facility was amended to be based on the Company’s level of liquidity (defined as the sum of the Company’s aggregate cash holdings and the amount available under its revolving commitments) and range from, with respect to Alternate Base Rate loans, 0.5% to 1.0%, and, with respect to LIBOR loans, 1.5% to 2.0%. Among other changes, the First Amendment also removed the fixed charge coverage ratio covenant and the consolidated leverage ratio covenant, and added a general liquidity covenant requiring the Company to maintain liquidity of at least $200.0 million in unrestricted cash, of which $100.0 million in cash or cash equivalents must be held in accounts subject to control agreements with, and maintained by, SVB or its affiliates.
 
The Company was in compliance with the financial covenants under the Senior Facility as of September 29, 2018. As of September 29, 2018, the Company had no outstanding borrowings under the Senior Facility and had outstanding letters of credit totaling $36.8 million, issued to cover various security deposits on its facility leases.

Letters of Credit
 
As of September 29, 2018 and December 31, 2017, the Company had outstanding letters of credit of $36.8 million and $36.9 million, respectively, in each period issued to cover the security deposit on the lease of its office headquarters in San Francisco, California, and other facility leases.
v3.10.0.1
Commitments and Contingencies
9 Months Ended
Sep. 29, 2018
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
 
Leases
 
The Company’s principal facility is located in San Francisco, California. The Company also leases office space in various locations with expiration dates between 2019 and 2024. The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions which require the Company to pay taxes, insurance, maintenance costs or defined rent increases. All of Company’s leases are accounted for as operating leases. In June 2018, the Company notified the lessor of its intent to sublease a portion of one of its San Francisco offices. Under the terms of the lease, the lessor has the right to recapture this space. The lessor elected to exercise their recapture right effective August 1, 2018, which resulted in a reduction of approximately $81.4 million in the Company’s future lease obligations associated with this lease. Future minimum payments under the Company’s noncancelable lease agreements, reduced by the recaptured amount, was as follow (in thousands):

Remaining 2018
$
8,399

2019
33,550

2020
29,387

2021
27,130

2022
26,850

Thereafter
37,554

Total future minimum lease payments
$
162,870



 Rent expense is recorded over the lease terms on a straight-line basis. Rent expense was $7.3 million and $10.4 million for the three months ended September 29, 2018 and September 30, 2017, respectively, and $24.1 million and $29.6 million for the nine months ended September 29, 2018 and September 30, 2017, respectively.

Purchase Commitments

The aggregate amount of open purchase orders as of September 29, 2018 was approximately $434.6 million, of which $185.0 million related to the Company’s migration to a third-party hosting provider. The Company cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. The Company’s purchase orders are based on its current needs and are fulfilled by its suppliers, contract manufacturers, and logistics providers within short periods of time.

During the normal course of business, the Company and its contract manufacturers procure components based upon a forecasted production plan. If the Company cancels all or part of the orders, or materially reduces forecasted orders, it may be liable to its suppliers and contract manufacturers for the cost of the excess components purchased by its contract manufacturers. As of September 29, 2018, $11.6 million was accrued for such liabilities to contract manufacturers.


Legal Proceedings

Jawbone. On May 27, 2015, Aliphcom, Inc. d/b/a Jawbone (“Jawbone”), filed a lawsuit in the Superior Court of California in the County of San Francisco against the Company and five of its employees who were formerly employed by Jawbone, alleging trade secret misappropriation and unfair and unlawful business practices against all defendants, and alleging breach of contract and breach of implied covenant of good faith and fair dealing against the employee defendants. The complaint sought unspecified damages, including punitive damages and injunctive relief. On June 23, 2016, Jawbone filed a Second Amended Complaint, adding a sixth employee defendant and related allegations.
On June 10, 2015, Jawbone and BodyMedia, Inc., a wholly-owned subsidiary of Jawbone (“BodyMedia”), filed a lawsuit against the Company in the U.S. District Court for the Northern District of California, alleging that the Company infringes certain U.S. patents. The complaint sought unspecified compensatory damages and attorneys’ fees from the Company and to permanently enjoin the Company from making, manufacturing, using, selling, importing, or offering the Company’s products for sale. The lawsuit was stayed pending resolution the investigation in the U.S. International Trade Commission (the “ITC”).

On July 7, 2015, Jawbone and BodyMedia filed a complaint with the ITC requesting an investigation into purported violations of the Tariff Act of 1930 by the Company and Flextronics International Ltd. and Flextronics Sales and Marketing (A-P) Ltd. The complaint makes the same patent infringement and trade secret misappropriation claims as the two earlier cases. The complaint seeks a limited exclusion order and a cease and desist order halting the importation and sale of the infringing products. The ITC instituted the investigation on August 17, 2015. As a result of motions, all of the patent infringement claims were dismissed from the case. A trial on the trade secrets allegations took place from May 9 to 17, 2016. On August 23, 2016, the administrative law judge concluded that the Company did not misappropriate any Jawbone trade secrets. On October 20, 2016, the ITC terminated the investigation in the ITC. Jawbone appealed the dismissal of the patent infringement claims to the Federal Circuit. Oral argument was scheduled for November 9, 2017.

On September 3, 2015, the Company filed a lawsuit against Jawbone in the U.S. District Court for the District of Delaware, alleging that Jawbone’s activity trackers infringe certain U.S. patents. This case was transferred to the U.S. District Court for the Northern District of California. The trial was scheduled for July 13, 2020. On September 8, 2015, the Company filed a complaint for patent infringement against Jawbone in the U.S. District Court for the Northern District of California, asserting that Jawbone’s activity trackers infringe certain U.S. patents. No trial date was set. On October 29, 2015, the Company filed a complaint for patent infringement against Jawbone in the U.S. District Court for the District of Delaware, asserting that Jawbone’s activity trackers infringe certain U.S. patents. That case was also transferred to the U.S. District Court for the Northern District of California. No trial date was set.

On November 2, 2015, the Company filed a complaint with the ITC requesting an investigation into violations of the Tariff Act of 1930 by Jawbone and Body Media. The complaint asserted that Jawbone’s products infringe certain U.S. patents. The complaint sought a limited exclusion order and a cease and desist order halting the importation and sale of infringing products. The ITC instituted the investigation on December 1, 2015. On December 23, 2016, the Company filed a motion to terminate the investigation, and the ITC terminated the investigation on February 1, 2017.

On December 8, 2017, the parties announced the global settlement of all of the outstanding civil litigation on confidential terms. Each of the pending cases has been dismissed with prejudice.

On August 12, 2016, the Company was notified by Jawbone that Jawbone had received a confidential subpoena from the U.S. Attorney’s Office for the Northern District of California requesting certain of the Company’s confidential business information that appeared to be related to Jawbone’s allegations of trade secret misappropriation. On February 17, 2017, the Company received a subpoena for documents from the same office. On February 1, 2018, the Company received a second subpoena for documents. The Company is cooperating with the U.S. Attorney’s Office. On June 14, 2018, the six former Jawbone employees who were named as individual defendants in the state trade secret case were charged in a federal indictment with being in possession of certain Jawbone trade secrets.

Sleep Tracking. On May 8, 2015, a purported class action lawsuit was filed against the Company in the U.S. District Court for the Northern District of California, alleging that the sleep tracking function available in certain trackers does not perform as advertised. Plaintiffs seek class certification, restitution, an award of unspecified compensatory and punitive damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. On January 31, 2017, plaintiffs filed a motion for class certification. Plaintiffs’ motion for class certification was granted on November 20, 2017. On April 20, 2017, the Company filed a motion for summary judgment. The Company’s motion for summary judgment was denied on December 8, 2017. During the three months ended June 30, 2018, the parties agreed to a settlement and on August 1, 2018, the plaintiffs filed a motion for preliminary approval of the class action settlement. On September 13, 2018, the court held a hearing and denied preliminary settlement approval without prejudice and ordered revised settlement papers be filed by October 26, 2018.

Heart Rate Tracking. On January 6, 2016 and February 16, 2016, two purported class action lawsuits were filed against the Company in the U.S. District Court for the Northern District of California, alleging that the PurePulse® heart rate tracking technology does not consistently and accurately record users’ heart rates. Plaintiffs allege common law claims, as well as violations of various states’ false advertising, unfair competition, and consumer protection statutes, and seek class certification, injunctive and declaratory relief, restitution, an award of unspecified compensatory damages, exemplary damages, punitive damages, and statutory penalties and damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. On April 15, 2016, the plaintiffs filed a Consolidated Master Class Action Complaint and, on May 19, 2016, filed an Amended Consolidated Master Class Action Complaint. On January 9, 2017, the Company filed a motion to compel arbitration. On October 11, 2017, the Court granted the motion to compel arbitration. Plaintiffs filed a motion for reconsideration, and that motion was denied on January 24, 2018.
On February 20, 2018, plaintiffs filed a Second Amended Consolidated Master Class Action Complaint (“SAC”) on behalf of plaintiff Rob Dunn, the only plaintiff not ordered to arbitration, as a purported class action. The SAC alleges the same common law claims, as well as violations of false advertising, unfair competition, and consumer protection statutes of California and Arizona, and also seeks class certification, injunctive and declaratory relief, restitution, an award of unspecified compensatory damages, exemplary damages, punitive damages, and statutory penalties and damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. On March 13, 2018, the Company filed a motion to dismiss for failure to state a claim and separately moved to strike the class allegations. The Court dismissed the claims for revocation of acceptance, violation of California’s Song-Beverly Consumer Warranty Act, and unjust enrichment, and allowed the remaining claims pending amendment to the complaint with further details. Plaintiff filed a Third Amended Complaint on June 19, 2018. The Court granted the motion to strike and ordered the plaintiff to amend to make clear that he is seeking to represent a class of opt-outs only, but that plaintiff would be free to amend in the event Fitbit’s arbitration agreement was found to be unenforceable.

In response to an April 3, 2018 arbitration demand from Kate McLellan, one of the original plaintiffs who was compelled to arbitration, the Company attempted to resolve the individual claim with Ms. McLellan. At the May 31, 2018 hearing, the Court expressed concern that the Company was “picking off” McLellan and thereby undermining the arbitration option and the Court’s prior order on arbitration, and ordered additional briefing. On July 24, 2018, the Court awarded the plaintiffs their attorneys’ fees on the motion practice, but denied plaintiffs’ request that the arbitration right should be waived as a sanction. The parties are moving forward in private arbitration with Ms. McLellan.

The Company believes that the plaintiffs’ allegations are without merit, and intends to vigorously defend against the claims. Because the Company is in the early stages of this litigation matter, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from this matter.

Securities Litigation. On January 11, 2016, a putative securities class action was filed in the U.S. District Court for the Northern District of California naming as defendants the Company, certain of its officers and directors, and the underwriters of the Company’s initial public offering (the “IPO”). On May 10, 2016, the Court appointed the Fitbit Investor Group (consisting of five individual investors) as lead plaintiff, and an Amended Complaint was filed on July 1, 2016. Plaintiffs allege violations of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended, based on alleged materially false and misleading statements about the Company’s products between October 27, 2014 and November 23, 2015. Plaintiffs seek to represent a class of persons who purchased or otherwise acquired the Company’s securities (i) on the open market between June 18, 2015 and May 19, 2016; and/or (ii) pursuant to or traceable to the IPO. Plaintiffs seek class certification, an award of unspecified compensatory damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. On July 29, 2016, the Company filed a motion to dismiss. The court denied the motion on October 26, 2016. On April 26, 2017, the Company filed a motion for summary judgment, which is still pending.

On April 28, 2016, a putative class action lawsuit alleging violations of the Securities Act was filed in the Superior Court of California, County of San Mateo, naming as defendants the Company, certain of its officers and directors, the underwriters of the IPO, and a number of its investors. Plaintiffs allege that the IPO registration statement contained material misstatements about the Company’s products. Plaintiffs seek to represent a class of persons who purchased the Company’s common stock in and/or traceable to the IPO and/or the November 2015 follow-on public offering (the “Secondary Offering”). Plaintiffs seek class certification, an award of unspecified compensatory damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. On May 17, 2016, a similar class action lawsuit was filed in the Superior Court of California, County of San Francisco. The cases have now been consolidated in the County of San Francisco. On April 7, 2017, the Court granted a motion to dismiss the Section 11 claim based on the Secondary Offering and stayed the cases.
On January 8, 2018, the plaintiffs in the federal and class action cases filed their motion for preliminary approval of settlement of the putative federal and state class actions for $33.3 million, which the Company accrued for as of December 31, 2017. On January 19, 2018, the court entered an order preliminarily approving the proposed settlement, and on April 20, 2018, the court approved the final settlement. The federal and class action cases have been dismissed with prejudice.
On November 11, 2016, a derivative lawsuit was filed in the U.S. District Court for the Northern District of California derivatively on behalf of the Company naming as defendants certain of its officers and directors and as a nominal plaintiff the Company. The plaintiffs allege breach of fiduciary duty, unjust enrichment, section 14(a), and misappropriation based on the same set of alleged facts in the federal and state securities class action litigation. On February 2, 2017, a second derivative lawsuit was filed in the U.S. District Court for the District of Delaware on the same allegations and also including claims for abuse of control, gross mismanagement, and waste. On June 27, 2017, another derivative law suit was filed in the U.S. District Court for the Northern District of California on the same allegations. The Courts have ordered a stay in all three cases.
On June 1, 2017 and June 9, 2017, two additional derivative lawsuits were filed in the Delaware Court of Chancery. Plaintiffs allege breach of fiduciary duty and insider trading against certain defendants who sold shares in the IPO and/or the Secondary Offering. On August 3, 2017, another derivative lawsuit was filed in the Delaware Court of Chancery on the same allegations. There is temporary stay in all three cases. On March 15, 2018, the three derivative lawsuits were consolidated and a Second Amended Complaint was filed on the same allegations of the individual complaints, alleging the same claims, and seeking the same remedy. On April 26, 2017, the Company filed a motion to dismiss for failure to state a claim. The hearing on the motion was held on September 6, 2018.
On October 31, 2017, a seventh derivative lawsuit was filed in the Superior Court of California, Country of San Francisco, on the same allegations. The Company has not yet been served in that case.
On June 27, 2017, an individual investor lawsuit alleging violations of the Securities Act and state law claims for statutory fraud and unfair business practice was filed in the Superior Court of California, County of Alameda, naming as defendants the Company and certain of its officers. The allegations are based on the same set of alleged facts in the federal and state securities class action litigation. The individual case was resolved at a June 13, 2018 mediation.
The Company believes that the plaintiffs’ allegations in the derivative actions and individual action are without merit, and intends to vigorously defend against the claims. Because the Company is in the early stages of these litigation matters, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from these matters.
Immersion. On July 10, 2017, Immersion Corporation filed a lawsuit against the Company in the U.S. District Court for the Northern District of California, alleging that certain Fitbit devices infringe on U.S. Patent Nos. 8,059,105, 8,351,299, and 8,638,301. On October 5, 2017, the Company filed a motion to dismiss on grounds the patents are not eligible subject matter for patents. On March 5, 2018, the Court granted in part and denied in part, granting as to the ‘301 patent, but denying as to the other two patents.
On July 10, 2017, Immersion Corporation also filed a lawsuit against the Company in the Shanghai Intellectual Property Court, alleging infringement of three Immersion Chinese patents. In addition to the Company, Immersion named Runtong, one of the Company’s former distributors in China. On August 23, 2017, two additional defendants were added, Fitbit Shanghai and Rkylin, a current distributor in China. In December 2017, the Company filed petitions to invalidate the patents. The invalidation proceedings as to all three patents were instituted. Hearings on two of the patents were held on April 16, 2018 and April 26, 2018; the third was scheduled for May 30, 2018.
On July 8, 2018, the parties entered into a settlement agreement resolving the litigation globally. The cases have been dismissed with prejudice.

Other. The Company is and, from time to time, may in the future become, involved in other legal proceedings in the ordinary course of business. The Company currently believes that the outcome of any of these existing legal proceedings, including the aforementioned cases, either individually or in the aggregate, will not have a material impact on the operating results, financial condition or cash flows of the Company. With respect to existing legal proceedings, the Company has either determined that the existence of a material loss is not reasonably possible or that it is unable to estimate a reasonably possible loss or range of loss. The Company may incur substantial legal fees, which are expensed as incurred, in defending against these legal proceedings.
Indemnification
In the ordinary course of business, the Company enters into commercial agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware corporate law. The Company also currently has directors’ and officers’ insurance.
v3.10.0.1
Stockholders' Equity
9 Months Ended
Sep. 29, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stockholders' Equity
Stockholders’ Equity
 
Stock Option Exchange

On April 13, 2017, the Company filed its definitive proxy statement and submitted to stockholders a proposal for a stock option exchange program (the “Program”). The Program allowed the Company employees, including its executive officers other than its President, Chief Executive Officer, and Chairman, Chief Technology Officer, and Chief Financial Officer (“Eligible Employees”), to exchange out-of-the-money or “underwater” options to purchase shares of the Company’s Class A common stock or Class B common stock currently held by such Eligible Employees for a lesser number of restricted stock units (“RSUs”) that may be settled for shares of its Class A common stock, (“New RSUs”), under the Company’s 2015 Equity Incentive Plan (the “2015 Plan”). Each New RSU represented an unfunded right to receive one share of the Company’s Class A common stock on a date in the future, which generally is the date on which the New RSU will vest. Eligible Employees participating in the Program received one New RSU for every two “out-of-the-money” options that they exchanged. The New RSUs would generally vest over the remaining vesting period of the exchanged option (subject to a one-year minimum vesting period). None of the members of the Company’s board of directors were eligible to participate in the Program. On May 25, 2017, the Company’s stockholders approved the Program at the 2017 Annual Meeting of Stockholders. The Company subsequently commenced the Program by filing a tender offer statement on Schedule TO with the SEC on June 21, 2017. The Program expired on July 19, 2017. A total of 3.7 million “underwater” stock options were tendered by the Eligible Employees, representing approximately 85% of the stock options eligible for exchange. On July 20, 2017, the Company granted an aggregate of 1.8 million New RSUs under the 2015 Plan in exchange for the “underwater” stock options tendered. The completion of the Program resulted in total incremental unrecognized stock-based compensation expense of $8.5 million, to be recognized over the greater of one year or the remaining vesting service period of the tendered stock options.

Equity Incentive Plans

In May 2015, the Company’s board of directors and stockholders adopted and approved the 2015 Plan. The 2015 Plan became effective on June 16, 2015 and serves as the successor to the Amended and Restated 2007 Stock Plan (the “2007 Plan”). The Company ceased granting awards under the 2007 Plan, and any outstanding stock options and RSUs granted under the 2007 Plan would remain subject to the terms of the 2007 Plan. As of September 29, 2018, 18.3 million shares of Class A common stock were reserved and available for future issuance under the 2015 Plan.

Stock Options
 
Stock option activity under the equity incentive plans was as follows (in thousands, except per share amounts):
 
Stock Options Outstanding
 
Number of
Shares Subject
to
Stock Options
 
Weighted–
Average
Exercise
Price
 
Aggregate
Intrinsic
Value (1)
Balance—December 31, 2017
21,386

 
$
3.01

 
 
Granted

 

 
 
Exercised
(2,339
)
 
2.33

 
 
Forfeited or canceled
(582
)
 
7.05

 
 
Balance—September 29, 2018
18,465

 
2.97

 
$
50,236

 
 
 
 
 
 
Stock options vested and expected to vest—September 29, 2018
18,455

 
2.97

 
50,219

Stock options exercisable—September 29, 2018
16,758

 
2.72

 
48,539


 
(1) The aggregate intrinsic values of stock options outstanding, exercisable, vested and expected to vest as of September 29, 2018 were calculated as the difference between the exercise price of the stock options and the fair value of the Class A common stock of $5.35 as of September 29, 2018.

 Restricted Stock Units
 
RSU activity under the equity incentive plans was as follows (in thousands, except per share amounts):
 
RSUs
Outstanding
 
Weighted-
Average
Grant Date
Fair Value
Unvested balance—December 31, 2017
19,188

 
$
9.13

Granted
13,709

 
5.11

Vested
(7,806
)
 
8.42

Forfeited or canceled
(4,389
)
 
8.07

Unvested balance—September 29, 2018
20,702

 
$
6.96


 
On May 4, 2018, the Company issued 0.8 million shares of market-based awards that vest based upon the achievement of a specified stock price. Market conditions were factored into the grant date fair value using a Monte Carlo valuation model, which utilized multiple input variables to determine the probability of the Company achieving the specified stock price targets. Stock-based compensation expense related to these awards will be recognized over the requisite service period regardless of whether the market condition is satisfied, provided that the requisite service period has been completed.

Employee Stock Purchase Plan

In May 2015, the Company’s board of directors adopted the 2015 Employee Stock Purchase Plan (the “2015 ESPP”), which became effective on June 17, 2015. A total of 3.8 million shares of Class A common stock were initially reserved for issuance under the 2015 ESPP. The 2015 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock through payroll deductions at a price per share equal to 85% of the lesser of the fair market value of the Company’s Class A common stock (i) on the first trading day of the applicable offering period and (ii) the last trading day of each purchase period in the applicable offering period. Except for the initial offering period, the 2015 ESPP provides for 6-month offering periods beginning in May and November of each year.

Warrant

On July 10, 2017, the Company issued a warrant to purchase 0.5 million shares of Class A common stock. The warrant is exercisable based on service and performance-based conditions and has an exercise price of $5.23 per share and a contractual term of ten years. As of September 29, 2018, 0.5 million warrants were outstanding.

Stock-Based Compensation Expense
 
Total stock-based compensation expense recognized was as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Cost of revenue
$
1,999

 
$
1,379

 
$
5,129

 
$
2,889

Research and development
14,097

 
12,947

 
43,858

 
40,280

Sales and marketing
3,638

 
3,679

 
10,996

 
11,301

General and administrative
4,381

 
4,792

 
13,630

 
12,786

Total stock-based compensation expense
$
24,115

 
$
22,797

 
$
73,613

 
$
67,256


 
As of September 29, 2018, the total unrecognized stock-based compensation expense related to unvested stock options and RSUs was $134.0 million, which the Company expects to recognize over an estimated weighted average period of 2.0 years.
v3.10.0.1
Income Taxes
9 Months Ended
Sep. 29, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
  
The Company is subject to income tax in the United States as well as other tax jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income tax.

For the three and nine months ended September 29, 2018, the Company recorded an expense (benefit) for income taxes of $(18.8) million and $4.2 million, respectively, for an effective tax rate of 90.2% and (2.1)%, respectively. The effective tax rate for the nine months ended September 29, 2018, was different than the statutory federal tax rate primarily due to the impact of a full valuation allowance on the Company’s U.S. deferred tax assets, the mix of income/losses between its foreign jurisdictions, and pretax losses in jurisdictions for which no tax benefit will be recognized. Included in this tax amount was a discrete tax benefit of $4.0 million in connection with a fixed assets depreciation tax method change filed with the 2017 income tax return.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) was signed into law and includes several key tax provisions that affected the Company, including a reduction of the statutory corporate tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, elimination of the carryback of net operating losses generated after December 31, 2017, and changes to how the United States imposes income tax on multinational corporations, among others.

In December 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address U.S. GAAP application when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects by the 2017 Tax Act. For the nine months ended September 29, 2018, no changes have been made to the provisional amounts previously recorded. The Company is still finalizing certain provisional amounts and will complete its analysis within the measurement period in accordance with SAB 118.

On July 24, 2018, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to share-based compensation. This opinion reversed the prior decision of the United States Tax Court. On August 7, 2018, the court withdrew the opinion issued on July 24, 2018 to allow time for a reconstituted panel of judges to confer. The Company will continue to monitor this case.

For the three and nine months ended September 30, 2017, the Company recorded an expense for income taxes of $86.2 million and $51.9 million, respectively, for an effective tax rate of (317.3)% and (28.8)%, respectively. The effective tax rate for the nine months ended September 30, 2017 was different than the statutory federal tax rate primarily due to the impact of a valuation allowance recorded against U.S. deferred tax assets, and the mix of income between United States and foreign jurisdictions.

The Company accounts for deferred taxes under ASC Topic 740, “Income Taxes” (“ASC 740”), which involves weighing positive and negative evidence concerning the realizability of the Company’s deferred tax assets in each jurisdiction. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. As of September 29, 2018, the Company maintained a full valuation allowance against all its U.S. deferred tax assets. No valuation allowance has been recorded against the Company’s foreign deferred tax assets. The Company will continue to assess the realizability of its deferred tax assets in each of the applicable jurisdictions going forward.

As of September 29, 2018, the total amount of gross unrecognized tax benefits was $38.8 million, of which $25.9 million would affect the effective tax rate if recognized. The Company does not have any tax positions as of September 29, 2018 for which it is reasonably possible that the total amount of gross unrecognized tax benefits will increase or decrease within the following 12 months.
v3.10.0.1
Net Loss per Share
9 Months Ended
Sep. 29, 2018
Earnings Per Share [Abstract]  
Net Loss per Share
Net Loss per Share
 
The following table sets forth the computation of the Company’s basic and diluted net loss per share (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Numerator:
 
 
 
 
 
 
 
Net loss
$
(2,056
)
 
$
(113,403
)
 
$
(201,201
)
 
$
(231,722
)
 
 
 
 
 
 
 
 
Denominator: